Dodd-Frank Rule 21F-7 is enforced for the very first time

Last time around, we looked at Judge Gwin’s opinion in US ex rel. Barko v. Halliburton, et al., and the importance of that discovery dispute in the larger framework of the False Claims Act. The Barko case is significant for another reason as well — in addition to being the first time a court has applied 48 CFR 52.203-13 the Barko case also generated a first-of-its-kind SEC enforcement action under the new Dodd-Frank rules.

On April 1, 2015 the Securities and Exchange Commission announced the enforcement action against Halliburton, who had been charged with violating whistleblower protection Rule 21F-17 enacted under the Dodd-Frank Act.

A bit of background may well be in order.

A Very Short History of Dodd-Frank and Rule 21F-7

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, was by any measure a wide-ranging bill covering many aspects of the American economy. Most important for our purposes, Dodd-Frank amended the Securities and Exchange Act by adding a Whistleblower program and — in section 21F of the law — authorizing the SEC to prepare a set of rules for that program.

The congressional purpose underlying these provisions was clear — Congress wished to replicate the success of the federal False Claims Act by encouraging insiders (i.e., whistleblowers) to report possible violations of securities laws. The Dodd-Frank Act provided financial incentives to such whistleblowers, prohibited employment-related retaliation, and provided various confidentiality guarantees to whistleblowers who come forward.

The SEC later promulgated a set of rules implementing these provisions of the Dodd-Frank Act, including Rule 21F-17. The rule states in relevant part that “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … ”

Now, on to the enforcement action against Halliburton/KBR…

Halliburton’s Unlawful Conduct…

Halliburton had violated rule 21F-17, the SEC alleged, by requiring employees to sign an agreement with unlawful language. The relevant language, which was required of everyone who made an internal report of suspected wrong-doing, stated, in relevant part:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

Perhaps most interesting of all, the SEC investigation was triggered by an astute government employee who happened across Judge Gwin’s opinion discussed above. (It might also have been tipped off by Barko’s top-notch counsel at KK&C). KBR agreed to pay a $130,000 penalty to settle the matter and the company voluntarily amended its confidentiality statement by adding language making clear that employees are free to report possible violations to the SEC and other federal agencies without KBR approval or fear of retaliation.

The SEC may still be a civil enforcement agency without real teeth, but it is good to see that it might have gotten a little better since the days of Harry Markopolos…